Iraq turmoil impacts oil industry; higher gas prices could result

Oil markets are watching in alarm as Sunni militants sweep through northern Iraq, creating havoc and endangering the country’s revival into a leading oil producer and major contributor to the stability of global energy prices.

Oil markets are watching in alarm as Sunni militants sweep through northern Iraq, creating havoc and endangering the country’s revival into a leading oil producer and major contributor to the stability of global energy prices.

The chaos already has sent world oil prices rising, as government forces and militants battle over the country’s largest refinery. Iraq’s big oil fields are far from the fighting in the Shiite south, but there are fears that the fractured nation could struggle to help meet future world demand.

“Iraq has always mattered to the oil market, not only because of its current production and exports _ it is the second-largest OPEC crude exporter today _ but also because of its huge reserves and untapped potential,” said Maria van der Hoeven, executive director of the International Energy Agency.

The IEA this week cut its forecast for Iraqi oil production growth, citing the beleaguered country’s “prevailing security, institutional and investment risks.”

The militant offensive is taking a toll on the country’s oil infrastructure, halting repairs on the export pipeline from Kirkuk to the port of Ceyhan in Turkey, which was shut down by sabotage in March. There also has been heavy fighting between Iraqi security forces and militants over the oil refinery in Baiji, Iraq’s largest, which provides fuel and electricity to the country’s northern and western provinces.

The violence so far has not approached the southern oilfields, which account for at least 75 percent of Iraq’s production of 3.4 million barrels a day. Most of that oil goes from the port of Basra to tankers in the Persian Gulf for export, with China and India the biggest customers.

The U.S. imports only about 300,000 barrels a day from Iraq, but disruption in Iraqi production would further spike global oil prices and raise gasoline costs in America. The motor club AAA, which monitors gasoline prices, says U.S. drivers already are seeing an impact at the pump, and that what happens in Iraq will influence the summer driving season.

“AAA has predicted that drivers will pay relatively high prices this summer, ranging from $3.55-$3.70 per gallon. However, this range may be higher if unrest in Iraq escalates or disrupts oil production in the region,” the auto club said in a statement on the crisis.

Sen. Bernie Sanders, a Vermont independent, said that speculators are using the Iraq crisis as an excuse to artificially drive up oil and gasoline prices.

“I am getting tired of big oil companies telling us that gasoline prices are going up because of the turmoil in Iraq,” Sanders said this week. “The truth is that big oil will never miss an opportunity to increase the price of gas. The fact is that high gasoline prices have less to do with supply and demand and more to do with Wall Street speculators driving prices up in the energy futures market.”

White House spokesman Jay Carney said the Obama administration is watching closely “and at this point, we have not seen major disruptions in oil supplies in Iraq.”

The southern oilfields are deep in Shiite territory and are protected by government forces and local militias hostile to the Sunni militants operating under the banner of the Islamic State of Iraq and Syria. Oil companies are getting nervous, though, and are pulling foreign workers out.

While experts said the big oilfields are secure, at least for now, they cited the risk of guerrilla attacks and sabotage of pipelines and other infrastructure, as well as the possibility ISIS could at least make an attempt to extend the fight with a military assault into Baghdad and further south.

“In the end, however, it comes down to people and their loyalties, particularly for unconventional threats,” Michael Wittner, head of oil market research at the French bank Societe Generale, said in a research note. “Both oil workers and oil police may have individuals that sympathize with ISIS, due to religion, politics or money. For ISIS, if they want to strike at the Shiite government, disrupting their main source of revenue seems to be an obvious strategy.”

Analysts at the global energy consulting firm IHS said they expect oil prices to stay up as long as the Iraq crisis lasts, even if there is no disruption to supply. Markets are spooked because of the potential for problems in a nation that is being counted on to increasingly pump more oil to meet global demand. IHS said the risk of outages is adding to a geopolitical “premium” on oil prices.

If Iraq descends into worse violence, or splinters for the long term into regional factions, analysts said foreign investment could slow. That could throw into question Iraq’s comeback as a top oil producer, IHS Energy Senior Director Jamie Webster said in an interview.

“Certainly this has a significant amount of downside risk,” he said.

The Iraqi crisis comes as the global oil inventory is already stretched thin by unrest that’s halting production in Libya, Sudan and Nigeria, as well as sanctions on Iran and Syria and high demand for petroleum in China, according to firms that monitor the global petroleum markets.

Analysts said Iraq’s impressive oil revival, along with booming production in the U.S. and Canada, has provided an important source of supply.

“This Iraq issue kind of a hit a market that was transitioning from, ‘We’ve got plenty of supply,’ to ‘Oh my gosh, we’re short,’” said Robert McNally, president of the Rapidan Group, an energy consulting firm.

While analysts said they don’t expect a major sustained drop in Iraqi exports, the markets will get very nervous if that does happen, said IHS researcher Webster.

That would raise questions about how much capacity Saudi Arabia has to pump more oil to make up the difference, he said. The result, he said, could be oil prices approaching the $147 a barrel mark set in 2008. It was a time when American drivers had to pay record costs for gas.

“There is a lot of incentive to keep the Iraqi production from not going offline,” Webster said.